Sovereignty

9/11

The Lawful Money Question

by Dr. Edward Flaherty

The constitution in Article I,
section 10 reads "No state shall…coin money, emit bills of credit, make
any thing but gold and silver a tender in payment of debts…" This
means that the only constitutionally valid forms of money are gold or silver
coin. This is called ‘lawful money.’ U.S. paper money used to be
redeemable in lawful money, but no more. Our monetary system is based on
unconstitutional forms of money. At least, this is how a few conspiracy
theorists see it.

The source of their confusion
is easy to see and, in this case, easy to understand. Simmons (1939) and
Cross (1939) shed some light on the subject. The phrase ‘lawful money’
had appeared repeatedly in the money and banking laws of the U.S. in the first
half of this century, but had never been explicitly defined. It first
appeared on February 25, 1862 when Congress authorized the issue of greenbacks
and declared them to be "lawful money and a legal tender" for all
debts, public and private. 1 This
terminology may have been adopted to promote the acceptability of the
currency, since the occasion was the first in which Congress attempted to make
a paper money a legal tender. 3
At this point in time, then, the terms ‘lawful money’ and ‘legal tender’ had
no distinct meaning. They were they same thing.

During the Civil War era
Congress gave several types of money the status ‘lawful money.’ On March
17, 1862 Congress declared that Treasury notes (not the T-note debt instrument
we know by that name today) were lawful money. February 12, 1862 saw
Congress make clearinghouse certificates a lawful money. After the Civil
War, on July 12, 1870, Congress placed the U.S. back on the gold standard and
specified what types of money national banks could count to meet their legal
reserve requirements. "The terms ‘lawful money’ and ‘lawful money
of the United States," the Act read, "when applied to these banks
shall be held and construed to mean gold or silver coin of the United
States." 1 So, by 1870 greenbacks,
Treasury notes, clearinghouse certificates, and gold and silver coin were all
‘lawful money.’ The annoying part, though, is that Congress never stated
exactly what lawful money was supposed to be. The only concrete
conclusion that can be reached is that lawful money and legal tender were two
separate things. Lawful money was money that banks could count toward
satisfying their reserve requirements. Legal tender was any money that
government would accept in payment of taxes. Some money was lawful
money, but not all lawful money was legal tender. And vice versa.

Confused?

One last example of the
confusion Congress created on the lawful money topic concerns Federal Reserve
notes. Prior to 1933-34, they were redeemable at any Federal Reserve
bank "in gold or lawful money," and Federal Reserve banks were
compelled to hold a 35% reserve "in gold or lawful money" behind
their deposits. Congress did not use the phrase "in gold or in
other forms of lawful money." It definitely set the terms in
contrast to each other. This leads one to conclude that Congress did not
deem gold to be lawful money, which at the time would have been absurd. 1

After 1933 all forms of U.S.
money were conferred with legal tender status. This set up a paradox for
currency redeemability. Federal Reserve notes and U.S. Notes, for
example, were redeemable in "lawful money," but what was lawful
money? Because redeemability had ended, there was no longer any
distinction between lawful money and legal tender. Federal Reserve notes
were therefore redeemable with other Federal Reserve notes, or with U.S.
Notes, or with any other legal tender.

To illustrate how some people
were confused by this, consider the following correspondence between the U.S.
Treasury and citizen of Cleveland. 2

December 9, 1947

Honorable John W.
Snyder
Sec. of the Treasury
Washington, D.C.

Dear Sir:

I am sending you herewith via registered mail one ten-dollar Federal Reserve note. On this note is inscribed the following:

"This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury or at any Federal Reserve bank."

In accordance with this statement, will you send me $10.00 in lawful money?

Very truly yours,
A.F. Davis

*****

December 11, 1947

Mr. A.F. Davis
12818 Colt Road
Cleveland 1, Ohio

Dear Mr. Davis,

Receipt is acknowledged of
your letter of December 9th with enclosure of one ten dollar Federal Reserve
note.

In compliance with your
request, two five-dollar United States notes are transmitted herewith.

Receipt is hereby
acknowledged of two $5.00 United States notes, which we interpret from your
letter to be considered lawful money. Are we to infer from this that
Federal Reserve notes are not lawful money?

I am enclosing one of
the $5.00 notes which you sent me. I note that it states on the face,
"The United States of America will
pay to the bearer on demand five dollars."

I am hereby demanding five
dollars.

Very truly yours,
A.F. Davis

*****

December 29, 1947

Mr. A.F. Davis
12818 Colt Road

Cleveland 1, Ohio

Dear Mr. Davis:

Receipt is acknowledged of
your letter of December 23rd, transmitting one $5 United States note with a
demand for payment of five dollars.

Your are advised that the
term "lawful money" has not been defined in federal legislation.
It first came to use prior to 1933 when some United States currency was not
legal tender but could be held by national banking institutions as lawful
money reserves. Since the act of May 12, 1933, as amended by the Joint
Resolution of June 5, 1933, makes all coins and currency of the United
States legal tender and the Joint Resolution of August 27, 1935, provides
for the exchange of United States coin or currency for other types of such
coin or currency, the term "lawful money" no longer has such
special significance.

The $5 United States note
received with your letter of December 23rd is returned herewith.

Very truly yours,
M.E. Slindee,
Acting Treasurer

*****

It is understandable how
reasonable people can become confused when studying the history of the terms
‘lawful money’ and ‘legal tender’ in U.S. history. The blame for this
rests with Congress who never bothered to define lawful money when it first
used the term. However, the line of thinking that it is defined by the
constitution as only gold or silver coin is incorrect. The constitution
makes no such definition. Moreover, the restriction that States not make
anything but gold or silver a legal tender does not apply to Congress, only to
the States. Congress may declare anything it wishes a legal tender.
And as the history above shows, it certainly has.